2000.04 REV-2 CHG-1 CHAPTER 7. HUD-APPROVED TITLE II ...

2000.04 REV-2 CHG-1

CHAPTER 7. HUD-APPROVED TITLE II NONSUPERVISED MORTGAGEES AND LOAN CORRESPONDENTS AUDIT GUIDANCE

7-1 Program Objective. HUD insures mortgages made by private lending institutions to finance the purchase of single family and multifamily homes. HUD approves the mortgagees for participation in the mortgage insurance programs for single family and multifamily homes as evidenced by the mortgagee's receipt of the yearly verification report in the last month of its fiscal year. HUD approves lending institutions which belong to the Federal Reserve System or with Federal Deposit Insurance Corporation or National Credit Union Administration insurance on their accounts. These types of institutions are designated by HUD as supervised mortgagees. HUD also approves other financial institutions designated as nonsupervised mortgagees, loan correspondents, and investing mortgagees which have authority to originate, purchase, sell, or service HUD-insured mortgages depending on the type of institution. These institutions are approved on the basis of their financial capacity, experience, facilities, and other criteria as specified in HUD Handbook 4060.1 .

7-2 Program Procedures . All mortgagees and loan correspondents, whether supervised or nonsupervised, must apply for initial or branch approval to participate in the HUD/FHA mortgage insurance programs through the Lender Approval and Recertification Division at HUD Headquarters, following the directions in HUD Handbook 4060.1, Mortgagee Approval and Recertification. After a review of the application and clearance through certain Headquarters systems, the applicant, if approved, will be assigned a unique HUD/FHA identification number and notified that it may now originate FHA insured mortgages.

7-3 Reference Material

Document

Title

24 CFR Part 202

Regulations Relating to the Office

of Assistant Secretary for Housing-Federal

Housing Commissioner,

Department of Housing and Urban

Development

Mortgagees Letters Various

HUD Handbook 4000.2 Mortgagee's Handbook-Application

REV-1

Through Insurance (Single Family)

HUD Handbook 4000.4 Single Family Direct Endorsement Program

HUD Handbook 4060.1 Mortgagee Approval and Recertification

HUD Handbook 4060.3 Field Office Guide for Mortgagee Monitoring

HUD Handbook 4110.2 Mortgagee's Guide-Home Mortgage Insurance Fiscal Instructions

HUD Handbook 4155.1 Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Family Properties

HUD Handbook 4205.1 Single Family Coinsurance Program

HUD Handbook 4330.1 Administration of Insured Home Mortgages

HUD Handbook 4330.4 FHA Single Family Insurance Claims

HUD Handbook 4350.4 Multifamily Mortgagees

7-4 Reporting Requirements. A Title II, nonsupervised mortgagee or loan correspondent is required by 24 CFR Part 202 annually to submit an audit report to the Commissioner within 90 days of the close of its fiscal year. The audit shall be performed under Government Auditing Standards and shall include the auditor's report on the basic financial statements and a computation of the mortgagee's Adjusted Net Worth. These reports are required for every Title II nonsupervised mortgagee or loan correspondent regardless of the number of loans originated or serviced during the fiscal year. All instances of noncompliance identified by the auditor must be reported as findings, even in those cases where corrective action was taken by the auditee after the end of the fiscal year. A suggested format for the computation of Adjusted Net Worth and the list of unacceptable assets are shown in paragraph 7-6 of this chapter.

For nonsupervised mortgagees, other than nonsupervised loan correspondents, the audit report shall also cover internal controls, compliance with specific requirements that have a direct and material effect on HUD-assisted mortgages, including: an opinion on compliance with specific requirements applicable to major HUD-assisted programs (or a report on compliance with specific requirements applicable to nonmajor HUD-assisted program transactions).

For nonsupervised loan correspondents, although the audit is performed under Government Auditing Standards, the office of Housing has changed the compliance and auditing requirements. The scope of the auditors, testing of compliance with internal controls and the presentation of the results of those tests may be included in the auditors' report on the basic financial statements. The audit is not subject to the requirements or procedures of paragraph 7-5 except where mandated by Government Auditing Standards.

Except for Ginnie Mae issuers, one copy of the report should be sent by the auditee to:

Mailing address:

U.S. Department of HUD Lender Approval and Recertification Division Room B-133 3214 Plaza 451 Seventh St. SW Washington, DC 20410-8888

Delivery:

U.S. Department of HUD Lender Approval and Recertification Division Suite 3214 490 L'Enfant Plaza East Washington, DC 20024

When a Title II mortgagee is also a Ginnie Mae issuer, the audited financial statements are now sent only to Ginnie Mae for review (See Chapter 6). Lenders/mortgagees that are approved under both Title I and Title II and also are Ginnie Mae issuers must submit one set of audited financial statements to Ginnie Mae and another, for Title I, to the Office of Lender Activities and Program Compliance.

All servicing/origination income must be accounted for in compliance with FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or subsequent amendments.

Where the mortgagee/loan correspondent is a subsidiary and information on its assets, liabilities and results of operation are included in the consolidated financial statements of its parent entity, HUD will accept the audited consolidated financial statements of the parent, if it includes consolidating schedules, audited by the IA, which distinguish the balance sheet and operating statement of the mortgagee/loan correspondent subject to the HUD audit requirement. The consolidating schedules must be subjected to the auditing procedures applied to the consolidated statement of the parent and the auditor's opinion must cover the financial statement accounts of the subsidiary.

A sample auditor's report on the consolidating balance sheet and operating statement is included as Attachment A to this Chapter.

7-5 Compliance Requirements and Audit Areas

A. Quality Control Plan

1. Compliance Requirement

HUD-approved mortgagees are required to originate and service HUD-insured mortgages in accordance with accepted practices of prudent lending institutions and comply with all relevant Departmental rules and regulations. Each HUD-approved mortgagee is required to establish and maintain a written quality control plan in accordance with HUD Handbook 4060.1 REV-2, Chapter 9 or the latest HUD guidance for loan origination and servicing. Each approved mortgagee must develop and implement a quality control plan consistent with its needs, and the above referenced guidance, to assist corporate management in determining whether HUD requirements and the mortgagee's policies and procedures are being followed by its personnel. The monthly quality control procedures may be conducted by the entity itself internally or an external review, which may be performed by the independent auditor or other qualified organization.(24 CFR Subsection 202.5(h)).

2. Suggested Audit Procedures

a. Obtain a copy of the mortgagee's quality control plan and compare it to the general and specific requirements contained in Handbook 4060.1.

b. Determine whether the mortgagee has a procedure in place which assures that all employees involved in loan origination and servicing understand the mortgagee's quality control policies and procedures.

c. Inquire whether the mortgagee relies on an internal or external quality control review of its origination, underwriting, and servicing functions. If the mortgagee relies on the external review process and the IA's engagement includes the performance of the quality control review, the IA should report this as part of the additional information required under Chapter 2 of this guide. If the mortgagee relies on an internal review, determine that it was

performed by knowledgeable personnel with no direct responsibilities in the areas they reviewed.

d. Review the supporting documentation of the most recent quality control review to determine that it included a review of a representative sample in accordance with guidance in HUD Handbook 4060.1 . It should also include a random sample of insured loans being serviced by the mortgagee or its agent. Determine that any branch offices received an on-site review as required by HUD Handbook 4060.1 and that the plan includes coverage for any loan correspondents and authorized agents of the mortgagee.

e. Review the supporting documentation to determine that the required general and specific elements included in Handbook 4060.1 REV-2, Chapter 9 were included in the quality control review. The Quality Control Plan must provide for the written reverification of the mortgagor's employment, deposits, gift letter or other sources of funds.

f. Obtain a written copy of the latest quality control report and determine that senior management officials also received a copy which included any deficiencies identified during the review. Determine that the mortgagee also notified the Office of Lender Activities and Program Compliance of any violations, false statements or program abuses in the report.

g. Determine that senior management officials promptly initiated corrective action for all deficiencies noted.

B. Branch Office Operations

1. Compliance Requirement. A mortgagee may maintain one or more branch offices for the submission of applications for mortgage insurance. A traditional branch office is a separately located unit of the mortgagee, in an office in which no business except that of the

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